NFTs, non-fungible tokens, are the latest craze that has swept the world, generating excitement, opportunity, and vast amounts of money. They’ve been around since 2017, but it wasn’t until 2021 that they rocketed to another level, generating an estimated $25 billion in total sales.
An NFT in its most basic terms is this: you attach a certificate of authenticity to a digital item by way of cryptography on a Blockchain - this provides proof that it is the original item, giving it value. When you sell the item, the certificate of authenticity is transferred to the new owner too, thus maintaining its value. There are dedicated marketplaces for selling NFTs, the most popular of which is OpenSea on the Ethereum Blockchain or Rarible. Most NFTs are bought with cryptocurrency like Bitcoin or with US dollars.
You can add NFTs to almost anything - paintings, photos, music, videos, documents, memes, gifs. Some recent high profile NFTs include Jack Dorsey’s (Twitter co-founder) first-ever tweet which sold for $2.9 million, the ‘Charlie bit my finger’ YouTube video that went viral in 2007 sold last year for $760,000, and selfies are taken by an Indonesian student each day for the duration of his studies have now made him a millionaire.
Why have NFTs become so popular?
You may be asking yourself, ‘why would anyone pay millions for something they can easily go on the internet and copy for themselves?’. That is an excellent question, to which I’m still pondering the answer. Many of the early adopters of this tech, and indeed many enthusiasts, will say it puts ownership of digital property back in the hands of the original creators, therefore giving them greater freedom, scope of distribution, and monetisation of their work – a royalty can be incorporated into the NFT so the creator is automatically paid each time the NFT is re-sold. By purchasing an NFT you are contributing to this movement.
Others view them as an asset to invest in. Many have made huge profits in the last year buying NFTs at a lower price and ‘flipping’ them, sometimes within a few hours, while the market is still hot.
But why would anyone pay millions of dollars for something that has no physical existence? Most likely for the same reason anyone buys any piece of art or memorabilia. People have always longed to own that rare one-of-a-kind item, whether it be for bragging rights, sentimentality, or for its aesthetics and history. And if they can afford to, they will pay astronomical fees for them. Art has always polarised people, especially modern art. Remember Tracey Emin’s Messy Bed? It sold at auction for $4 million dollars in 2014. One person may look at an object and think it is a masterpiece, someone else may look at the same object and think it’s a piece of junk. And therein lies part of what gives an object value - what does it mean to you? Supply and demand is another consideration, and of course, how much resource has gone into creating it. Add all of those ingredients together and the value of any object, physical or digital, can rise quicker than your pizza dough.
The Mona Lisa by Leonardo da Vinci hangs on a wall in the Louvre, protected by a velvet rope (as well as other more sophisticated security features). Millions of people, from all around the world, flock to see it each year. Every one of them waits (in)patiently to get to the front of the velvet rope to take photos of it and post them on their Insta or Meta (Facebook) feeds. They have, for all intents and purposes, copy and pasted this one-of-a-kind, original masterpiece. Despite having a photo of it on their phones, if they had an opportunity to buy the original, and it was within their financial means to do so, do you not think some of these people would jump at that chance? Yes, you can copy almost anything from the internet, but that will not deter some people from still wanting to be the certified owners of the original.
The Dangers of NFTs
The use of the Blockchain and crypto is what provides the NFT its authenticity and lets you know a digital item is the original...but is it? How do you really know? How do you know it has been listed by the real creator? You are putting an enormous amount of trust in people you do not know and have never met, without any regulation or protection. Anyone with knowledge of the Blockchain and cryptography can ‘mint’ an item and pass it off as their own original property. What security checks are in place to detect fraud or stolen items? If you can hack someone’s laptop, you could steal all of their valuable data and sell it as NFTs.
To compound matters, even if you could identify a fraudulent transaction, you wouldn’t be able to identify the thief or locate them due to the inherent anonymity of the Blockchain. So how would you attempt to retrieve your stolen property? What legal jurisdiction would you use? It is a very murky and tricky legal area to navigate. As the popularity and demand for NFTs increases, so too will the attempts of criminals to exploit the system for their nefarious greed.
There have already been many reports of fake or stolen NFTs sold on the marketplace. Popular artists like Lois van Baarle, Aja Trier, and Qing Han have fallen victim to this online theft. The use of bots to flood the market with hundreds or thousands of illegal NFTs, literally overnight, has made it increasingly difficult to monitor.
OpenSea has previously stated they are working hard to clamp down on plagiarised or counterfeited work, continuously developing new methods to detect fraudulent activity, which they claim has so far resulted in action against 3500 illegal listings each week. However, they have defended the use of bots on their site which produce thousands of genuine collectibles, such as Bored Ape Yacht Club and Pudgy Penguins. Many still believe much more needs to be done to redress the ongoing situation, and this was further exacerbated by a recent tweet from OpenSea admitting that 80% of NFTs created via their free minting tool were fakes, scams, or plagiarised work.
What will the future hold for NFTs?
Will the NFT craze fizzle out as quickly as it exploded or will it continue to grow and become a mainstay of our daily lives? Probably the latter if industry reports from the last month are anything to go by. According to data from DappRadar, despite the recent crypto market crash (down almost 50% from the peak highs in November 2021), January 2022 saw the highest ever total sales of NFTs in a single month with $16 billion.
It’s impossible to predict with any accuracy, but you can make an educated guess based on the moves of big players. That being said, the future success of NFTs may be linked to the development and success of the Metaverse. Microsoft and Meta (Facebook) have invested heavily in building their own online worlds, whilst Apple and Google are developing AR and VR headsets.
Buying virtual real estate as an NFT in metaverse environments has become increasingly popular of late. Tokens.com recently purchased $2.5 million worth of digital property in Decentraland - a 3D world where users can buy land and then build whatever they like on it. The most popular NFTs bought in 2021 were collectibles, including digital clothing, with most selling for between $100-$1000 each.
If the metaverse does become the next big thing, it’s quite possible NFTs will play a big role. In a digital utopia, where avatars are a representation of yourself, humans will always crave the social status derived from owning that dress, those shoes, or that artwork, especially one-of-a-kind originals.
By: Alvin Michael
The views and opinions expressed herein are the author’s and are not intended to be used as advice to trade on the crypto markets.